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Affin Hwang: Rating downgrade unlikely if Malaysia can meet deficit target
KUALA LUMPUR: Affin Hwang Capital Research does not expect a sovereign rating downgrade on Malaysia in spite of the high possibility of the government resetting the fiscal deficit to a higher level temporarily due to extraordinary circumstances.
Its chief economist and head of research Alan Tan said the rating agencies are likely to sustain their ratings on Malaysia as “stable” for as long as the government can meet expectations on its revised targeted budget deficit.
“The federal government may reset the fiscal deficit target to a higher level due to the unpaid tax refunds and also the temporary revenue loss from the goods and services tax (GST), which has been abolished,” Tan said at Affin Hwang’s briefing on the preview of Budget 2019 and the economic outlook for the year ahead.
“When we look back at history, even when the fiscal deficit target was at a level higher than 4%, these sovereign rating agencies had maintained Malaysia’s A- rating.
“What I am trying to illustrate is that in the coming Budget 2019, the government is expected to continue detailing out its plans to consolidate the fiscal position.
“We think the rating agencies would also continue to maintain the rating outlook as ‘stable’,” he added.
According to the presentation slides, Moody’s Investors Service, S&P and Fitch Ratings each have rated Malaysia an A3 Stable, A- Stable and A- Stable, respectively.
Tan also noted that the country’s fundamentals remained strong and these were also supported by the current account surplus position with a good amount of reserves. “Because of these factors, when seen in comparison to other countries in the region, we think that the risk of a downgrade or caution by the three rating agencies would likely be low,” he said.
Affin Hwang Capital Research expects the country’s fiscal deficit to drop slightly to 3.6% to 3.8% in forecast 2018, but expects this position to improve again in forecast 2019 to 3.3% to 3.6%.
“When we look at the country’s fiscal deficit position, assuming in the coming budget they reset the fiscal deficit to a higher level and then improve it in 2019, and further to a fiscal deficit of 3% in 2020, then we are fine.
“However, the budget should strike a balance between sustaining economic growth and looking at ways to correct the fiscal deficit target,” he said.
“If assuming that in the coming budget the government projects a deficit of, say, 3.3% to 3.6% (for 2019) and by next year if the fiscal deficit were to deteriorate from these levels, then there could be a possibility where sovereign rating agencies issue a caution on Malaysia,” Tan added.
Source: https://www.thestar.com.my/business/business-news/2018/11/01/affin-hwang-rating-downgrade-unlikely-if-malaysia-can-meet-deficit-target/#O5VhjfrIwwtoymgA.99